I am pleased to inform you about the 2010 allocations for Qualified School Construction Bonds (QSCBs) and Qualified Zone Academy Bonds (QZABs), as well as recent legislation and guidance concerning QSCBs and QZABs, and to remind you that the 2008 allocation for QZABs will expire at the end of this calendar year. QSCBs and QZABs are bonds the Federal Government subsidizes by allowing bondholders to receive tax credits that are approximately equal to the interest that States and communities would pay holders of taxable bonds.

On March 18, 2010, the President signed the Hiring Incentives to Restore Employment Act (Public Law 111-147). This legislation gives bond issuers the option of issuing QSCBs and QZABs as bonds under which an issuer may receive a cash subsidy from the Federal Government as opposed to providing bondholders with a tax credit. Issuers of QSCBs and QZABs that elect to receive the direct payment will receive payments equal to the lesser of the actual interest rate of the bonds on each interest payment date or the tax credit rate set daily by the U.S. Department of the Treasury for municipal tax credit bonds. Further information about these direct payments may be found in IRS Notice 2010-35 posted at http://www.irs.gov/pub/irs-drop/n-10-35.pdf.

As you know, the American Recovery and Reinvestment Act of 2009 (ARRA) authorized allocations under the QSCBs program for 2009 and 2010. The ARRA made available, to States and certain large local educational agencies (LEAs), $11 billion for 2009 and $11 billion for 2010 in QSCB bonding authority for construction, rehabilitation, or repair of a public school facility, and for the acquisition of land on which the school facility is to be constructed with QSCB funds. Charter schools as well as traditional public schools may benefit from QSCBs. States may directly issue the bonds on behalf of eligible schools or they may suballocate authority to issue the bonds within the State.

Under the QSCB program authorization, 40 percent of the total bond limitation is allocated to the largest school districts. The statute defines these school districts as the 100 LEAs with the largest numbers of children aged 5 through 17 from families living below the poverty line and not more than 25 additional LEAs as designated by the Secretary of Education. While I did not designate any additional LEAs in 2009, I designated three additional LEAs as large school districts for 2010: Marion County School District (FL), Knox County School District (TN), and Omaha Public Schools (NE). These three LEAs have the largest numbers of children aged 5 through 17 from families living below the poverty line among the LEAs not included in the 100 large school districts. Accordingly, the Internal Revenue Service announced direct allocations to 103 large LEAs.

If a QSCB allocation to a State or a large LEA is unused for a calendar year, the State or large LEA, respectively, may carry it forward to the next calendar year, increasing the following year’s limitation. There is no limitation on the number of years to which unused allocations may be carried forward.

QZABs are another important tool that States and LEAs can use to provide additional resources for improving school facilities and instruction. The ARRA extended QZABs through 2010 and expanded the authority from $400 million in prior years to $1.4 billion for 2009 and 2010. In earlier years, QZABs could be purchased only by banks, insurance companies, and other companies engaged in the business of lending money. Effective October 2008, however, QZABs may be purchased by any individual or private business.

States and LEAs have considerable flexibility in the use of QZABs. They may be used for rehabilitating or repairing school facilities, purchasing equipment, developing curricula, and training school personnel, but not for new construction. To meet QZAB eligibility criteria, a public school (including a charter school) must be located in either an Empowerment Zone or an Enterprise Community (as designated by the Federal Government) or have at least 35 percent of its students eligible for free or reduced-price lunch under the National School Lunch Act. The school must also have an education program designed in cooperation with business; receive a private contribution (which may be in-kind), the net present value of which is not less than 10 percent of the proceeds of the bond; and have an education plan that is approved by its LEA. In addition, its students must be subject to the same standards and assessments as other students in the LEA.

As the following chart shows, previously authorized QZABs are still available. However, unused funds from the 2008 allocations will expire at the end of this calendar year and, to make use of these allocations, bonds must be issued by December 31, 2010. If a State does not issue the amount of QZABs allocated by the Federal Government between the calendar year the funds are first made available and the date by which they must be issued, the unused QZAB allocation expires and cannot be used.

QZABs Amount

Calendar year first available

Bonds must be issued by December 31 of the year

$400 million

2008

2010

$1.4 billion

2009

2011

$1.4 billion

2010

2012

Section 1601 of Division B of ARRA specifies that five specific tax-favored bond programs, including QSCBs and QZABs, are subject to Davis-Bacon prevailing wage standards. On May 5, 2010, the U.S. Department of Labor issued a memorandum that highlights the responsibilities of State and local government entities, contractors, and others for implementation of, and compliance with, the Davis-Bacon labor standards in connection with the identified ARRA bond projects. This guidance, which includes several resources on this subject, is posted at http://www.dol.gov/whd/recovery/AAM208.pdf. Questions regarding the applicability of the Davis-Bacon Act to a specific QSCB or QZAB project may also be directed to the Department of Labor via e-mail to WHDARRA@dol.gov.

The Internal Revenue Service issued the 2010 State allocations of QZABs bonding authority on February 9, 2010, and the 2010 allocations of QSCBs bonding authority for the States and the 103 large LEAs on March 17, 2010. The IRS Notices containing these allocations are posted at: http://www.irs.gov/pub/irs-drop/n-10-17.pdf for QSCBs and http://www.irs.gov/pub/irs-drop/n-10-22.pdf for QZABs. Enclosed are those tables for your information.

If you have questions about this information or these programs (other than the application of Davis-Bacon standards), please contact Branch 5 of the Internal Revenue Service, Office of Associate Chief Counsel (Financial Institutions and Products) (202-622-3980) or Jane Hess of the U.S. Department of Education (202-401-8292). I am confident that these bonds can help your communities meet some of their facility needs.